Here are a few things you need to know about Credit and Mortgage. First, the interest you have to pay on a mortgage can make a huge difference in the total amount of your loan. Next, your mortgage rate is crucially determined by your credit score.
The three major credit bureaus TransUnion, Experian, and Equifax compile your credit report on the basis of data about the history of your borrowings and paying back credit. The Fair Isaac Corp, which is a major producer of credit scores, takes these credit reports, apply their formula, and come up with one credit score ranging from 300 to 850.
Credit reports are not only significant to get a good rate but they influence whether you qualify to get a loan at all. Lenders are quite cautious about giving loans due to tight credit in the market. They tend to pay closer attention to your credit score when considering giving a loan.
Borrowers below a certain threshold are unlikely to get a loan. Generally, the top-tier ranges from 760 to 850. Borrowers having scores between this range are likely to get the lowest interest rate and more credit options. The borrowers below the score of 760 lie in the subprime category and they can be offered a little higher interest rate with less variety in loans.
Rates offered on a mortgage may vary across lenders. However, a score of 740 or more should qualify you for a good rate.
Your credit score may affect the mortgage rate regardless of other factors like your income, and assets. Lenders need borrowers with a history of on-time payment, low balances, and a mix of credit utilization. These factors determine the riskiness of lending. Due to this reason, they tend to demand higher yield on risky investments.
(READ ALSO: 7 Credit And Mortgage Myths Debunked)
The best thing to do before applying for a mortgage is to get your credit report from TransUnion, Equifax, and Experian. All borrowers are entitled to get a copy of their credit report annually. Compare all three scores and use the middle one.
You should check all details carefully and get the information corrected if you find any error. You should take the time and look at everything in detail. According to a survey, nearly 37 percent of consumers find inaccuracy when they check their credit reports.
If you find any errors, get them corrected immediately. All three bureaus have made this rectification process smooth with online systems.
Once you know your credit score, you can find ways to improve it by paying down your balances. Start by paying closer-to-the-limit credit first to improve your credit score.
You should never attempt to improve your score by closing down any credit account. When you close one or two of your credit accounts, you increase your ratio of indebtedness to the total amount of credit. This approach would further harm your credit score rather than improving it.
You cannot improve your score overnight. You can get a better score by showing consistency in paying off your balances and keeping your financial records clear.